Oil price: heading towards triple?10 Oct 2018 12:11
From today's FT:
Commodity prices have been a tale of two markets this year. Industrial metals have borne the brunt of slowing global activity, while the oil price has soared. It is hard to believe that barely three years ago, it was languishing below $30 a barrel.
The chart below shows the copper price — widely viewed as the barometer for the health of global economy — diverging notably from the oil price, which recently hit its highest level since 2014.
For now, one thought dominates the oil market psyche: US plans to impose a second round of sanctions on Iran in November, forcing governments and companies around the world to stop buying Iranian oil.
Add to this the impact of the looming US hurricane season, falling output from a politically and economically troubled Venezuela, plus supply disruption in Libya and you have a recipe for buoyant oil prices continuing.
This begs the question: is $80 the new base level for oil, or could we see a spike higher to $90, or even $100 a barrel in coming months?
It would be remiss to talk about the oil price without mentioning US shale gas. In recent years, new technology has enabled huge capacity expansion, promoting the US to the number one spot for oil production. A further uptick in shale gas supply, at least over the medium term, could rein in price rises.
However, over the shorter term, the infrastructure can’t keep pace — US pipelines are running at full capacity, and until new pipelines are built, there’s a lag in the amount of oil that can make its way from America into international markets. That’s part of the reason why there’s such a big gap between the price of Brent crude, the international benchmark, and the main US market, West Texas Intermediate (WTI).
This “bottlenecking” should be resolved with the construction of new pipelines and eventually US supply will find its way back into international markets, impacting the price downwards. There’s the rub. Although the oil price could potentially spike into triple digit territory, investors should expect any such uptick to be shortlived — not least if Opec steps up production.
This is arguably a good thing. History shows that once oil passes the $100 mark it becomes a drag on global growth, hurting consumers. Peak oil doesn’t bode well for emerging markets, already under pressure from higher rates and a rising dollar. For some countries, notably Russia, costly crude is a positive.
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